Spot premiums for physical crude have slipped from record highs reached earlier during the Iran war as refiners are drawing on inventories and cutting back processing to cope with lost Middle East supply, traders and analysts said. Since the U.S.-Israeli war on Iran that began on February 28 caused the near-total closure of the Strait of Hormuz, the global market has lost access to 500 million barrels of crude and refined products output, according to analysts at Citi. That sparked surging prices on panic buying, but the higher prices have destroyed demand from consumers and refiners.
Scouring the globe for replacements, refiners paid up, pushing premiums for barrels from Africa, the U.S. and Brazil, with some grades reaching record highs of more than $30 a barrel earlier this month. However, premiums are easing as refiners are opting to reduce output and home in on previously sanctioned barrels, while Chinese state majors Sinopec and PetroChina tap commercial reserves and sell spot market crude.
“Asian demand is starting to ease as refiners cut runs, shifting the market away from panic buying and toward more selective procurement, with Russian barrels dominating incremental demand,” Kpler analysts said in a note.
“This is feeding through into the Atlantic Basin, where weaker Asian pull and rising supply are putting pressure on medium sour and light sweet differentials.”
While strategic reserve releases and inventory drawdowns provide a buffer, they are insufficient to cover the 15-million-barrel-per-day loss in Middle East crude supply, meaning prolonged disruption from the Strait of Hormuz closure will continue to exert upward price pressure.
June Goh, a senior analyst at Sparta Commodities, said the correction brings prices back to “affordable” levels. “The physical crude shortage in the market is still there, so premiums would remain elevated versus pre-crisis level. However, it should not reach the panicked record levels that we saw previously,” she said.
RESERVE RELEASES, FALLING PREMIUMS
Sinopec will receive about 1 million bpd of crude from reserves during April to June, two traders familiar with the matter said, allowing its trading arm Unipec to sell some of its West African, Brazilian and Canadian cargoes in the spot market this month.
CNOOC and PetroChina also sold Canadian crude exported from the Trans Mountain pipeline (TMX) this month.
The companies did not immediately respond to requests for comments.
Earlier this month, Canada’s Access Western Blend exported through TMX sold at a record $8 a barrel to ICE Brent for July delivery to Asia, but that slipped to about $4 last week, said two trading sources familiar with the sales.
Similarly, premiums for European and West African crude have weakened with Ekofisk in the North Sea offered at a premium of below $10 a barrel to dated Brent on Tuesday, down by half from two weeks ago. Premiums for African grades such as Forcados, Bonny Light and Qua Iboe fell to $7.75 a barrel to dated Brent from just over $10 a barrel in mid-April.
Brazilian crude premiums have also dropped after offers rose past $30 a barrel earlier this month, traders familiar with the market said.
Taiwan’s Formosa Petrochemical bought 2 million barrels of Brazilian crude at premiums between $8 and $9 a barrel to dated Brent on delivered ex-ship basis, they said. Indian refiners have purchased Brazilian crude recently at premiums of nearly $5 to dated Brent, the traders said. Middle East crude premiums that surged to records in March also fell sharply this month and may prompt Saudi Aramco to cut term prices for June. Premiums for WTI Midland crude from the U.S. delivered to Asia have eased from records near $40 a barrel above Dubai quotes, with the latest deals to Japan at $20-$22 for August delivery, similar to levels a month ago, two traders who participate in that market said.
In Europe, WTI traded at $7.40 above dated Brent on Tuesday, compared with over a $22 per barrel premium two weeks ago.
Spot premiums are also falling as consumers are simply cutting back consumption of a range of oil products including naphtha for petrochemical makers, liquefied petroleum gas for cooking, diesel for trucking cargoes and fuel oil for ocean-going ships.
Morgan Stanley estimates that demand destruction is up to 4.3 million bpd in the second quarter, which will trigger an 800,000 bpd decline in total 2026 oil consumption, that would be the first drop in demand since the COVID-19 outbreak.
(Reporting by Siyi Liu and Florence Tan in Singapore, Seher Dareen and Robert Harvey in London and Arathy Somasekhar in Houston; Editing by Tony Munroe and Christian Schmollinger)